Trade Options and Earnhttp://tradeoptionsearn.com
Strategies and tools to generate steady incomeSat, 17 Sep 2016 19:22:28 +0000enhourly1https://wordpress.org/?v=4.5.3Power of Compounding and Options Tradinghttp://tradeoptionsearn.com/capital-growth/power-of-compounding-options-trading/
http://tradeoptionsearn.com/capital-growth/power-of-compounding-options-trading/#respondSun, 11 Oct 2015 17:19:42 +0000http://tradeoptionsearn.com/?p=344The power of compounding is your best friend when it comes to growing wealth. In very simple terms, a sum of money even when invested at a moderate rate of interest, compounding regularly, can grow to a huge corpus in a relatively short period of time.Albert Einstein, arguably one of the most intelligent men to […]

]]>The power of compounding is your best friend when it comes to growing wealth. In very simple terms, a sum of money even when invested at a moderate rate of interest, compounding regularly, can grow to a huge corpus in a relatively short period of time.

Albert Einstein, arguably one of the most intelligent men to have walked this planet, called compound interest, the “Eighth wonder of the world”. He described it as the most powerful force on the planet.

It is this power of compounding that I suggest you use to grow your corpus to allow you to move towards financial freedom in the long run.

The key here is moderate returns and regular compounding. Your corpus should be generating regular, positive returns and the returns should be reinvested.

How to generate regular and moderate positive returns?

The next obvious question is, where can you invest your money to generate such “regular and moderate positive returns”? Let us see some of the investment options commonly available to people:

Bank Deposits

Putting money in the bank is the safest investment that one can make. Hence the saying, “safe as money in the bank”. The bank pays you an interest on the money deposited in your account.

The biggest downside of this safety is the very low rate of interest. Historically, this rate does not even beat inflation. Hence your money actually loses its buying power with time if kept in the bank. Bank deposits certainly aren’t the way to create a compounding corpus.

Precious Metals

Precious metals like gold and silver have traditionally been the store of value. Their prices can especially go up in times of inflation. But they are also lacking as a way to generate steady and moderate positive returns. As we have seen in the past few years, their prices can go down and stay depressed for long periods of time. If you happen to need money during such a period of depressed prices, you will have to book your losses. Also, there is no straightforward way of making regular income from gold or silver while you hold them.

Commodities

These days it is possible to invest in particular commodities and it may give you healthy returns also. The downside with commodities is that you need to know very well, the commodity that you plan to invest in.

Also, with the recent slowdown in China (the biggest consumer of many commodities), that started in 2015, commodities are predicted to enter a multi-year bear market. It certainly isn’t my preferred method to generate long term, regular and moderate returns.

Art and Collectibles

Some people invest in art and collectibles and it can be very rewarding if you can pick winners. The one very big problem with art is that it has restricted liquidity. Outside of the well-known masters, most art has few buyers making price discovery very difficult.

Even if you have the “eye for art”, I find it closer to playing the lottery instead of making an investment. Also, there is no way to generate regular income with art. Unless you are an art dealer, I would recommend you stay clear of it for investment purposes.

Real Estate

Real estate is a popular form of investing among many. It indeed has formed the base for large fortunes. If invested and managed well, it can be a good investment over a long period of time. Real estate offers potential for both regular returns and capital appreciation.

While real estate solves many of the problems discussed above, it suffers from some of its own downsides as an investment vehicle. Real estate tends to be lumpy and illiquid. Home prices in many cities in North America tend to start from $300,000. Here, I am talking about live-able homes that you would want to invest in. even with 80% leverage and 20% of own money, we are looking at a minimum investment of $60,000.

There definitely is a possibility of generating a positive monthly cashflow through rental real estate, but such properties are not easy to find. Real estate comes with its management challenges and if you are not a hands-on person, repair and maintenance may eat significantly into your profits. Moreover, the 2007-08 sub-prime crisis has shown us that real estate prices need not necessarily always go up.

Stocks

Possibly the most famous method of investing, stock investments, over the long term, have created more millionaires than any other investment. Investing in stocks is easy to start and you can start with a small sum of money. Stocks of most good companies tend to be liquid.

But investing in stocks comes with two big downsides. One, stocks move in multi-year cycles. If you happen to get in near the top of a cycle, it may take you many years to break even. Two, apart from dividend, for the majority of people, there is no other way to make regular income from stocks. And dividends tend to be a tiny percentage for many fast growing companies – the like that you would want to invest in.

If we compare the above options available to normal people, real estate and stock come out on top. Indeed, it is no wonder that that is the investment method followed by most people.

My preferred way of investing is via stocks of good, large cap companies. But I use options trading to remove the two downsides that we discussed above. With those eliminated, stock investment with options trading gives a near perfect way to generate regular and moderate positive returns which when compounded give a big corpus.

Let us see by an example, how you can grow your corpus enormously by targeting a, not very ambitious, 3.5% monthly return (quite possible using the options techniques described) over a period of 10 years. The table below shows the value of your corpus if you start with $20,000 and generate a return of 3.5% per month. Just see how the power of compounding can grow your wealth.

Investment Horizon

Value of corpus

After 2 years

$45,667

After 5 years

$157,562

After 7 years

$359,765

After 10 years

$1,241,286

What $20,000 can become in 10 years with the power of compounding at a 3.5% monthly return

Let’s look at the same table at 5% monthly return. While 5% monthly return is not something that I recommend you target from Day 1 but, as time passes, you will get better. You can start aiming for higher returns with time.

The table below is to open your eyes to the possibilities and power of compounding. See what happens to $20,000 if compounded for 5% every month.

Investment Horizon

Value of corpus

After 2 years

$64,502

After 5 years

$373,584

After 7 years

$1,204,845

After 10 years

$6,978,240

What $20,000 can become in 10 years with the power of compounding at a 5% monthly return

The options strategies that I use give 3-10% monthly returns. Of course there are months where I suffer a loss but I always buy protection so that the loss is limited. Also, there are also months where the returns are more than 10%. In favorable market conditions, your monthly returns using the strategies that I discuss can even go up to 20-30%. Hence, average compounded monthly returns of 3.5% to 5% are quite possible to attain.

For a quick recap, here are the investment options available and how they compare on the important criteria used to evaluate investment options:

Regular Returns

% Returns

Liquidity

Specialized Knowledge

Management

Bank Deposits

Very Low

Not Required

Low

Precious Metals

Variable

Required

Low

Commodities

Variable

Required

Low

Art and Collectibles

Very Variable

Required

Low

Real Estate

Moderate and Variable

Required

High

Stocks

Moderate and Variable

Required

Moderate

Stocks with Options

Moderate and Fixed

Required

Moderate

You can see above that from the different investment options available to the common person, investing in stocks and generating a steady income with options based on your investment represents the most certain way that you can use to generate regular and moderate positive returns.

]]>http://tradeoptionsearn.com/capital-growth/power-of-compounding-options-trading/feed/0Why simple options trading strategies are better than complex ones?http://tradeoptionsearn.com/good-trading/simple-options-trading-strategies-better-than-complex/
http://tradeoptionsearn.com/good-trading/simple-options-trading-strategies-better-than-complex/#respondTue, 06 Oct 2015 21:37:54 +0000http://tradeoptionsearn.com/?p=321When it comes to options trading, KISS or Keep It Simple, Silly! is the mantra for success. Simple options trading strategies are more profitable in the short, medium or long run! Time and again, I have seen it with myself and fellow professional options traders.You are more likely to make steady and sustainable profits by […]

]]>When it comes to options trading, KISS or Keep It Simple, Silly! is the mantra for success. Simple options trading strategies are more profitable in the short, medium or long run! Time and again, I have seen it with myself and fellow professional options traders.

You are more likely to make steady and sustainable profits by executing the humble Covered Call, month after month as compared to going for fancy, multi-legged trades involving various combinations of options.

Executing simple options strategies has many benefits.

Higher Profit

This is may not be visible immediately when you draw the payoff profile of the options trading strategy. But when you combine the maximum and minimum payoffs with the probability of success of a trade, you will see that simple trades are definitely more profitable in the long run. You can use the Ultimate Options Visualizer to draw payoff profiles and calculate the profit and loss of your positions.

Low Involvement

When you execute simple options trading strategies, you do not need to be involved in managing the trade by looking at your ticker screen every minute. You can put in the trade and go about your work. If you do not have any other work, spend time with family, travel, read or just about do anything!

Easy to Initiate and Unwind

Simple options trading strategies tend to be easy to initiate and unwind as compared to the more complex strategies. You have lesser number of legs to buy and sell when getting in or getting out of the trade.

Easy to Manage

In case if the market goes against your position, it is easier and faster to manage a simpler strategy. You will have to execute one or two trades to offset a simple options trading strategy as compared to the multiple trades that you will need to execute to manage a complicated strategy.

Lower Brokerage

If your trade requires less frequent buying and selling, your brokerage costs will be lesser. Frequent buying and selling can hit you with a brokerage bill that can eat into your profits rather quickly. Simple options trading strategies tend to require lesser number of trades and hence have lesser brokerage costs associated with them.

Why do traders devise or execute “complicated strategies”?

If simple options trading strategies are more profitable and also have so many other advantages over more complicated trades, why do traders devise or execute “complicated strategies”? The answer to this question lies in understanding the mind-set of the trader behind trades.

I have invariably seen that it is more likely to see a professional hedge fund manager talk about complicated trading strategies. These are the people who manage anything from hundreds of thousands of dollars to hundreds of millions of dollars (at times, even more) of their clients’ money. They are highly educated and very highly paid employees of small or big hedge funds.

The very reason that they are highly paid maybe behind them talking about and taking complicated options positions. Somewhere, it has got to do something with them justifying their high salaries and bonuses.

This can be equated to the behavior of top football goalkeepers. In a study done on elite soccer goalkeepers by a team of Israeli scientists, the scientists analyzed 286 penalty kicks and found that 94 percent of the time the goalies dived to the right or the left – even though the chances of stopping the ball were highest when the goalkeeper stayed in the center. Why do goalkeepers almost always dive off to one side if the chances of a save are the highest if they stay at the center? Because, the goalkeepers are afraid of looking as if they’re doing nothing – and then missing the ball. Diving to one side, even if it decreases the chance of them catching the ball, makes them appear decisive.

The same, probably, holds true for highly paid hedge fund managers, vending complicated options trading strategies. They need to appear more knowledgeable than the humble government employee who trades options on the side for an additional income.

Generating Regular Profit with Simple Options Trading Strategies

The key to succeed in options trading is to generate regular profits trading options, the keyword being regular. In my experience, the most profitable options trading strategies for generating regular income are the ones that use time decay of options. Your profit in the created position increases with every passing day just because options lose their value with passage of time, everything else remaining the same.

A corollary to this is options trading does not require your full time involvement. Indeed, I have seen that I am more profitable when I am not looking at my position every few minutes or hours. But what options trading most definitely requires is the ability to control your emotions.

If you start generating steady monthly returns using simple options trading strategies and give the power of compounding, the time it needs, you will have a gigantic investment corpus.

]]>http://tradeoptionsearn.com/good-trading/simple-options-trading-strategies-better-than-complex/feed/0How to profit in the stock market without predicting market direction?http://tradeoptionsearn.com/good-trading/profit-in-stock-market-without-predicting-market-direction/
http://tradeoptionsearn.com/good-trading/profit-in-stock-market-without-predicting-market-direction/#respondSun, 04 Oct 2015 21:35:33 +0000http://tradeoptionsearn.com/?p=305For people seeking to be financially free, stock markets represent the ultimate frontier. One can open a trading account in a matter of minutes and start trading with very little capital. The thought of hundreds of thousands of dollars of profit rolling in as you laze around a sun kissed tropical beach is indeed, very […]

]]>For people seeking to be financially free, stock markets represent the ultimate frontier. One can open a trading account in a matter of minutes and start trading with very little capital. The thought of hundreds of thousands of dollars of profit rolling in as you laze around a sun kissed tropical beach is indeed, very alluring!

Many people set off on this journey. I am sure you know a few who have, in their lifetime. If you are reading this, you also may be contemplating or may already have started on your stock market journey.

But most do not make it. The trading world is littered with corpses of decimated dreams and pulverized portfolios.

Why is it that most people are unable to make profits in the stock markets consistently?

One big reason is that almost everyone knows how to make money in a rising stock market – you buy low and sell high. But, a much smaller percentage of people know that money can be made in a rising stock market and a falling stock market by short selling – sell high first and buy lower, later.

And even fewer people know that money can be made (lots of it) when the markets are rising, falling or direction less. And even fewer actually do it!

In fact, directionless or range bound markets can be the best friend of a trader, giving her the opportunity to make steady returns. Most stock markets spend long periods of time being range bound or directionless.

It is in these range bound times that savvy traders continue to make a healthy return on their money invested in stocks.

The world of traders is somewhat divided like this.

What percentage of people earn in rising, falling and directionless markets

Options Trading to profit in the stock market without predicting market direction

In the perfect trader’s world, the best way to get phenomenal and regular returns from the stock market means correctly predicting the direction the market will move and then placing trades accordingly. But for the most seasoned of traders with years of experience, with the latest technology and tools and an army of analysts for all sorts of data crunching, correctly predicting the direction of market movement on a regular basis remains an impossible to attain chimera.

On the other hand, Options Trading provides many strategies where you can generate regular income, even when the direction of your prediction of market movement goes wrong by a significant margin. This is the closest that one can possibly come to be able to profit in the stock market without predicting its future direction of movement.

These strategies are designed to give you a significant room for error if the market moves against your expectation. One such strategy that I employ very often is selling out of money credit spreads.

What are Out of Money Credit spreads?

Out of money (OTM) credit spreads involve selling out of money call or put options and buying further out of money call or put options. Since the sold options is closer to money than the bought option, there is a net credit in your account, hence they are credit (and not debit) spreads.

Let us understand this with an example. We will use Microsoft Options Chain (expiring in 3 weeks), as shown below for our example.

Strike Price

Call

Put

42

2.69

0.55

43

2.12

0.62

44

1.45

0.95

45

1.03

1.64

46

0.65

2.41

47

0.49

2.87

48

0.26

3.69

The underlying, Microsoft (MSFT) is at $45.

If you are bullish on Microsoft, your analysis tells you that there is a good likelihood of the price of Microsoft going down. You can construct a “Bull Put Credit Spread”. You can do that by selling, say 500, $43 put options for Microsoft at $0.62 per option. You will buy 500 $42 put options for $0.55 per option. Your net credit is $0.07 per option or $35 for 500 options.

You can see, you will earn $35 even if the market moves 4.5% in the wrong side of your expectation.

This is powerful. You can check out my options position excel that I use to visualize simple to complex options positions with calls puts and underlying stocks.

Also notice that along with selling out of money options, we buy equal number of further out of money options. While this reduces our profit levels, this is our insurance. Stock markets have a habit of surprising the best of traders. Our objective is to earn steady returns from stock markets with minimum risk. We are gunning for longevity. If we stay in the market long enough, the power of compounding will give our investments and income a massive booster dose.

You can build a converse, Bear Call Credit Spread if you are bearish on the underlying.

]]>http://tradeoptionsearn.com/good-trading/profit-in-stock-market-without-predicting-market-direction/feed/0Rental Income with Covered Callshttp://tradeoptionsearn.com/income-generation/rental-income-with-covered-calls/
http://tradeoptionsearn.com/income-generation/rental-income-with-covered-calls/#respondSat, 03 Oct 2015 18:56:18 +0000http://tradeoptionsearn.com/?p=301If you invest in a rental unit, what will be your first concern? For most people, it will be how soon it can be put out to rent and how much rent will I get out of it? After all, everyone likes a passive income. Ask any rental unit owner, how much she likes the […]

]]>If you invest in a rental unit, what will be your first concern? For most people, it will be how soon it can be put out to rent and how much rent will I get out of it? After all, everyone likes a passive income. Ask any rental unit owner, how much she likes the passive rent that she collects at the end of each month.

But, is it possible to collect rent from the stocks you own? Yes it is. Let me show you how.

Income Generation through Covered Calls

The options trading strategy you can use to collect rent from the stocks that you own is called Covered Calls. In this strategy, you sell out-of-money calls against the stocks that you own.

When you execute the covered call strategy against your long term stock portfolio, you benefit irrespective of the direction of movement of the underlying stock. The following cases may happen by the time of the expiry:

The stock moves down

You collect the call premium. You also reduce your cost of ownership of the stock as you have collected the call premium.

The stock remains the same

Just like the above case, you collect the call premium and you also reduce your your cost of ownership of the stock.

The stock moves up but not beyond the strike price of the sold call

In this case, you will still pocket the entire call premium. Also, your stock would have increased in value. Notice that while your portfolio value is increasing, your cost of the portfolio is coming down as you have collected the premium of the sold call.

The stock moves up beyond the strike price of the sold call

You will still profit in this case but your profit will be capped. Here, you will be called out and you will have to sell your stocks. You will sell your stocks for a profit as the strike price of your sold calls was more than the price of your stocks at the time of selling the calls. You will also keep the options premium. But here, you will not benefit from the movement of the stock beyond the strike price of the sold call.

The way to look at covered calls is that you have agreed to cap your profit on the stock that you own for the benefit of collecting a steady income every month. You can get around this limitation of putting a cap on your profits by choosing the strike price and expiry period well.

Selling covered calls regularly reduces your cost basis of the stock by giving you a nice, monthly premium. Covered Calls can be executed in many different ways. According to me, the most practical way to execute it is to sell out-of-money calls that are close to expiry. It is possible to generate 3 to 5% monthly returns selling covered calls. These returns, when reinvested can grow to a big corpus, thanks to the power of compounding.

Covered calls represent one of the easiest ways of collecting passive income from the stocks that you hold. In addition to that, it is practically risk free, when done against long term holding of stocks. This is one of my favorite strategies and I recommend that one must study it well and sell covered calls against her portfolio of stocks to collect a passive cash flow.